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How Assets Transfer at Death

Estate planning can be very tempting to ignore; the combination of tedium, taxes, and, of course, one's mortality is difficult to face.  Indeed, estate work is the epitome of the cliché "death and taxes".  However, neglecting such plans can leave your loved ones with a confusing and potentially expensive mess to sort out.  This post covers the three fundamental ways assets are transferred at death.

The first and probably most familiar is a Last Will and Testament.  Upon death, your assets make up your estate, and the transfer to your heirs is governed by the Will.  The document must go through the legal process of probate, which validates the Will and allows it to dictate the transfer of assets in the estate.  Probate can impose a burden of time and expense on the estate.  Probate can be limited or avoided by the use of trusts.

A trust is another way to transfer assets, and has the benefit of avoiding a probate.  A revocable trust, or "Living Trust", is type of trust that does not exist as a separate taxable entity from the individual while the individual is alive.  At death, the trust becomes a separate legal entity with its own EIN (employer identification number) and operates according to the trust agreement, which would specify how the assets are to be distributed.  A common error with this estate planning strategy is the failure to retitle all assets to the trust.  The title of assets to the trust is also called "funding" the trust, and any asset left outside the trust must go through the probate process.

While a trust can assist to avoid probate, the time and expense associated with creating a trust document and retitling assets can be every bit as costly as the creation of a Will—not to mention the time and expense associated with following the trust documents and distributing the assets when the time comes.  Therefore, the third way of transferring assets simplifies this process further by designating a beneficiary through each specific asset.  Bank accounts, brokerage accounts, 401(k) plans, and IRAs are all types of assets that will allow you to name a beneficiary or a transfer on death designation.

This is solely a broad overview of estate planning and should not be relied upon as either legal or tax advice.  You should consult with a legal and accounting professional for specific planning related to your situation.


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